The misunderstanding and confusion regarding companies in the British Virgin Islands (“BVI“) and the Cayman Islands (“Cayman“) and how they operate, are widespread. In an interconnected world, where business opportunities abound, it is perhaps more important than ever to debunk myths about jurisdictions such as the BVI and Cayman. A more complete and accurate recognition of their role in international business and what they have to offer would benefit the business and wider community alike.
Lack of Understanding of the BVI and Cayman as Jurisdictions
Several events, well-publicised in the media, and continued distortion of facts have served to put forward a one-dimensional narrative about the BVI and Cayman, which has contributed to a perception in some quarters that they are shrouded in secrecy, maintain low regulatory standards, facilitate the dissipation of tax and enable the harbouring of illicit funds.
However, the reality is very different. Since the global financial crisis of 2007-2008, larger countries have understandably been looking to increase their share of taxable income and capital. A number of initiatives such as the OECD / G20 BEPS Project (“BEPS” referring to base erosion and profit shifting) have been set up to attempt to reduce or overcome tax avoidance strategies. A recent development of such initiatives has been the signing of the Multilateral Convention to Implement Tax Treaty Measures to Prevent BEPS on 7 June 2017 by over 60 countries, including Egypt.
Although these measures are underpinned by creditable objectives, thinking generally regarding the BVI, Cayman and other similar international financial centres (“IFCs“) has been overshadowed by the more popular narrative, put forward by certain NGOs, political parties, elements of civil society and the media. Sensationalised developments such as the Panama Papers revelations have served only to offer a somewhat simplistic perspective, tarring all IFCs with the same brush. Rather than demonstrating substantive proof of wrongdoing, such detractors have rather fuelled misguided perceptions.
This article aims therefore to illustrate:
- how the BVI and Cayman are leaders in achieving international standards;
- reasons why BVI and Cayman companies have proven so popular; and
- the benefits of the BVI and Cayman as jurisdictions.
Robust International Standards
The BVI and Cayman rely heavily on their high levels of compliance with international standards in order to operate effectively.
Both jurisdictions have been assessed as highly compliant with the Financial Action Task Force (“FATF“) Recommendations regarding the global standard for fighting money laundering and terrorist financing – more compliant than many OECD member jurisdictions.
Far from being secretive jurisdictions, the BVI and Cayman were in fact early adopters of the Foreign Account Tax Compliance Act (“FATCA”) and the OECD’s Common Reporting Standard (“CRS”), so that their tax information is now exchanged with over 100 other countries. These jurisdictions are rated by the OECD as largely compliant regarding transparency and information exchange – the same rating as given to the UK, Germany and the US.
Corporate service providers licensed by the regulators in the BVI and Cayman have obtained and verified beneficial ownership information for 15 years or so, in line with FATF internationally approved anti-money laundering procedures. This information has been made available to the relevant authorities of certain other countries upon appropriate requests.
Both jurisdictions have recently further developed beneficial ownership information sharing by requiring companies to establish beneficial ownership registers and to make such information available to the UK’s law enforcement agencies and tax authority, upon an appropriate request. This information has been available to such agencies and this authority previously, but this new mechanism will streamline the investigatory process. The critical issue of the privacy and confidentiality of clients is maintained, as the registers are neither available to the public nor stored on a central register and the highest levels of cyber security are applied.
The professional sector in the BVI and Cayman operates with a high awareness of and sensitivity to compliance obligations, especially given the focus on achievement of international standards.
The care taken, as standard protocol, to balance the need for transparency with the need to protect the privacy of clients is ample evidence that neither jurisdiction supports secrecy or crimes such as tax evasion and money laundering. In fact, quite the opposite.
Reasons for using BVI and Cayman Companies
BVI and Cayman companies have been frequently used in Egypt, as they have in countries throughout the world, for a variety of purposes: as holding companies, borrower vehicles and investment companies. This frequency of use testifies to the success achieved by these companies.
The reasons for investors and businesses to use BVI and Cayman companies are manifold:
Simplicity: the formalities regarding the incorporation of companies are limited, so they can be incorporated on a same-day basis at a relatively low cost. Maintenance requirements are likewise limited; for instance, there is no requirement to have resident directors, to convene annual general meetings or (unless they are regulated entities) to prepare and file accounts. This reduces cost and administration.
Flexibility: the company law is aimed at sophisticated investors and provides a framework that can be adapted to give effect to investor requirements, such as bespoke share transfer (including pre-emption, drag-along and tag-along rights) and corporate governance arrangements (including deadlock resolution and reservation of additional matters for shareholder approval). This enables the constitution of companies to be tailored to many different situations.
Stability: the laws of the BVI and Cayman are based on English common law principles, which are well understood and recognised. The court systems are based on the English court system and there is a final right of appeal to the UK’s Privy Council, if needed. This is a strong source of comfort for investors, who may want the reassurance that if rights have to be enforced before a court, it will be before a familiar and trusted system.
Creditor friendliness: there are a number of characteristics of both jurisdictions that provide comfort to potential lenders to BVI or Cayman companies. These include no moratorium regime equivalent to Chapter 11, ease of serving proceedings, enforcement of foreign judgments and enforceability of security against a company in liquidation.
Tax neutrality: no direct taxation is levied in the BVI or Cayman. Taxes are due where money is made (such as corporation tax) and where the money is distributed (such as capital gains tax or income tax on dividends). IFCs such as the BVI and Cayman do not reduce those liabilities. They do, however, provide a tax-neutral platform where no investor is prejudiced by a particular local tax regime and this has the ultimate effect of cost reduction. Some of the sectors that use IFCs the most, such as pension funds, are tax-free altogether in any case. This is an area that is particularly misunderstood amongst detractors of the BVI and Cayman.
Assistance Provided by the BVI and Cayman
These jurisdictions are particularly alert to investor requirements and constantly evolve to provide products that are designed to be helpful to investors. For instance, Cayman has introduced a limited liability company, along similar lines to Delaware LLCs, so that the two forms of LLC can invest in parallel. The aim is to reduce costs and the administrative burden of running different forms of investment vehicle. In addition, Cayman has also introduced a foundation in the form of a company which may be used as a welcome alternative to a trust.
Despite growing pressure to adopt a never-ending stream of standards introduced in major jurisdictions, the governments in the BVI and Cayman work very closely with the private sector to ensure an appropriate balance is maintained. Issues of importance to their global client base are paramount.
The facts that underpin operations within the BVI and Cayman may not be as exciting as the sensationalised narrative put forward by many media outlets. However, despite a widespread lack of understanding of the BVI and Cayman as jurisdictions and what international standards they have achieved, the fundamental reasons for using companies incorporated in either jurisdiction remain the same. The truth, away from stereotypes, is that users of these companies can have confidence that they are subject to a prudent and leading regulatory regime, which evolves quickly to match increasing international standards.
If you would like any further information please speak with your usual Maples and Calder contact or:
+44 20 7466 1624 [email protected]
About the Author
Jack Marriott is head of the Corporate team of Maples and Calder in London. He specialises in corporate matters including advising financial institutions and public and private businesses on a full range of corporate transactions. His extensive experience includes IPOs, public and private M&A, joint ventures, buyouts, restructurings, debt financings and security arrangements as well as management incentive structures.
Maples and Calder is a leading international law firm advising financial, institutional, business and private clients around the world on the laws of the Cayman Islands, Ireland and the British Virgin Islands. MaplesFS, through its divisions Maples Fiduciary, Maples Fund Services and Maples Private Client Services, is an independent global provider of specialised fiduciary, fund administration, entity formation and management, insurance management and trust and private client services.
With over 1500 staff worldwide, the Maples group has offices in Bermuda, Boston, the British Virgin Islands, the Cayman Islands, Delaware, Dubai, Dublin, Hong Kong, London, Luxembourg, Montreal, the Netherlands, New York, San Francisco and Singapore.
© MAPLES AND CALDER
This article is intended to provide only general information for the clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.